How does budget airline AirAsia make money?

One would assume that they make money from ticket sales, but the answer is not that simple.

A few days ago, Malaysian low-cost airline AirAsia announced its third quarter business report. Accordingly, net profit reached 353.9 million ringgit, in contrast to a loss of 405.7 million ringgit in the same period last year.

AirAsia is the dominant low-cost carrier in Southeast Asia. If you want to find a quarter where ticket sales revenue covered operating costs, go back to December 2010. Since then, costs have far exceeded ticket sales.

If you subtract operating costs from ticket sales, AirAsia will regularly lose money.Even adding baggage fees and other fees doesn’t improve the situation much. In fact, AirAsia only breaks even when passengers spend on in-flight meals, advance booking fees, cancellation fees, and other miscellaneous expenses.

And if you really want to understand where they make their money, it's best to look at them not as an airline, but as a player in the aircraft leasing industry.Revenue from aircraft leasing was also the reason they made a profit in the third quarter.

AirAsia makes no profit from ticket sales. Photo: India Times

AirAsia is the largest Airbus customer among airlines, with 575 aircraft on order, of which 401 have yet to be delivered. That is the second-largest number after India’s InterGlobe Aviation. This gives AirAsia great bargaining power in terms of pricing and customizing aircraft to meet its requirements.

This is an additional source of revenue for them. Lessors like General Electric and BOC Aviation don’t get the same discounts that airlines do. So when AirAsia feels like it has too many planes on its balance sheet, it can sell them to a lessor, lease them back, and record the difference from the original purchase price. This makes them more money than operating the planes.

Of course, AirAsia CEO Tony Fernandes will not miss this attractive opportunity. In August, he said he could sell the aircraft leasing division this December, earning up to $1 billion.

This has some advantages. Investors have often been skeptical of AirAsia’s aircraft leasing business, especially since many of its deals are not with major leasing companies, but with its own subsidiaries in Indonesia, Thailand, the Philippines and India.

Last year, AirAsia shares lost more than half their value in less than three months after GMT Research published a report criticizing the accounting practices in the deals. However, the stock has recovered and more than doubled this year.

This would help Fernandes pay off his debts and quell the negative headlines in GMT’s report. While the airline’s return on equity (ROE) is 26% – similar to other low-cost carriers such as Ryanair and Southwest Airlines – its price-to-earnings (P/E) ratio is less than half that.

Leasing looks less attractive given the capital outlay, a situation that will be exacerbated if accounting standards for operating leases around the world change.

As a result, AirAsia’s profits have increasingly relied on non-ticketing revenue in recent quarters to prepare for this shift. Operating profit from non-leasing segments in the last three quarters has increased to 642 million ringgit, up from 614 million ringgit three years ago.

This suggests that the airline can do well without rental income. But it also means that AirAsia’s costs to its customers will have to increase, making it less competitive.

Besides, it also reduces AirAsia's power over Airbus. By selling its aircraft leasing business, they will just be one of dozens of small customers of Airbus.

Bloomberg says transparency and focus are good. But sometimes power is more valuable.

According to VNE